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The best is yet to comeCentral Europe CFO Survey 2015

2015 results | 6th editionBulgaria

© 2015 Deloitte Central Europe2

Undoubtedly 2014 was a year of uncertainty – a sentiment, having its roots in the political disequilibrium and reinforced by the fall of Corporate Commercial Bank.

Despite the unfavourable events on the political arena and in the finance sector, supplemented by the external uncertainty (still perceived abnormal), CFOs have not lowered their expectations about business prospects compared to the previous year.


Dear Reader,For the fourth consecutive time I have the privilege to introduce the report, which we produce as a result of the Deloitte CFO Survey. The reading presents the expectations of CFOs from the Bulgarian market compared to those of their peers from 13 Central European economies (Albania, Croatia, the Czech Republic, Estonia, Hungary, Kosovo, Latvia, Lithuania, Poland, Romania, Serbia, Slovakia and Slovenia). Coming exactly one year after the last report was released, this edition is again illustrating how CFOs’ attitudes have changed over the past 12 months.

Undoubtedly 2014 was a year of uncertainty – a sentiment, having its roots in the political disequilibrium and reinforced by the collapse of Corporate Commercial Bank. Despite the unfavourable events on the political arena and in the finance sector, supplemented by the external uncertainty (still perceived abnormal), CFOs have not lowered their expectations compared to the previous year. Generally, the survey respondents’ optimism stays flat, however I am sure you will be impatient to see some of the graphs on these pages. It may imply, even though shy, but still an increasing confidence.

I am pleased by the growing number of CFOs, who participated in this survey and I would like to take the opportunity to thank all of them for the responsivness to contribute for a meaningful report and for their interest in the key findings provided here. I believe that this survey edition will be a reading, which you will go through with curiosity from the first cover to the end.

Introduction

Introduction

1 Macroeconomic Insight

2 Key findings

3 Growth

4 Risk

5 Debt

6 Financing

7 Talent

8 Local context

Contents

Vasko RaichevChairmanDeloitte Bulgaria

Macroeconomic Insight



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Macroeconomic Insight

2014 was rich in events, but while the snap poll on October 5th was expected given the instable government and parliament, very few would predict turbulence in the financial sector with the collapse of the fourth largest lender Corporate Commercial Bank in the middle of the year.

Heavy rainfall in June, August and early September caused extensive damages to the infrastructure and agricultural sectors. Furthermore, the floods affected the tourist arrivals resulting in cancelled reservations.

Despite the unpredictable environment, Bulgaria’s economy registered a gradual recovery, with a growth rate of 1,5% at the year-end (compared to 1,1% in 2013), supported by the regained consumer and business confidence, the labor market on improving trend, the solid ground of the long-standing currency board (peg to EUR), fiscal conservatism and low public debt.

The first signals of lowered expectations came from EBRD in January*, with a downsized 2015 GDP growth forecast from 2,0% (September, 2015) to 0,8%. The downward revision takes into consideration the decline in oil prices and the weakness in oil-driven Russia, which affects the economies in the region.

*Regional Economic Prospects in EBRD Countries of

Operations: January 2015


Key Findings


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• Similar to the results from previous years, Bulgarian CFOs persistently remain cautious to take on additional risk on their companies’ balance sheets. This signals that the planned investments would be financed to a large extent with own funds.

• The widely held view of the CFOs who took part in the survey is that the level of external financial and economic uncertainty is very high, high, and above normal. This perception cannot be analysed in isolation to the problems the local financial sector found itself into last summer.

Key findings

• CFOs expect a modest economic growth in the range of 0-3%, reflecting both the situation in Europe and the effect of the inconclusive parliamentary election that took place last October.

• The majority of the respondents consider revenue growth as a top priority for their companies this year.

• CFOs are increasingly acknowledging that credit is easily available to their companies, compared to their responses a year ago.

• Nearly all of the participants in this edition of the survey expect the companies’ capacity to service debt to increase, or to remain as is over the next three years.

GrowthModerate development prospects



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Growth

More than a third of the CFOs that took part in the survey are at the opinion that the country will overcome stagnation, expecting modest GDP growth in 2015.

This expectation reflects the economic performance in the Euro Zone as a whole, impacting exports and at the same time is somewhat offset by continuing domestic political uncertainty, as the October 5th election proved inconclusive, almost inevitably impacting investor confidence.

The CFO’s consensus on economic growth remains somewhat unchanged compared to our previous survey from February, 2014 with GDP in the range of 0-3% for 2015.

Graph 1CFOs’ expectations for the country economic GDP growth for the year 2015

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In line with the modest expectation of GDP growth, half of our respondents remain neutral, not necessarily anticipating improvement in the levels of unemployment, compared to a year ago. Just less than one in every four CFOs believes unemployment will decrease in 2015. We note that labour costs remain significantly low compared to the rest of the EU member states, despite slowly converging to EU averages. The weak outlook for employment is likely to restrain real-wage growth.

Graph 2How CFOs expect levels of unemployment to change in Bulgaria over the next 12 months

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Fewer than 3% of the respondents are feeling very optimistic about the financial prospects of the company they represent. Yet, when previously asked, every one in six were less optimistic and now only one in nine shares the concern. CFOs are clearly more confident about their companies’ financial prospects, than they are about macro economic growth - a position shared by the majority of their colleagues across Central Europe.

Graph 3CFOs’ views on their companies’ financial prospects compared with six months ago

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Focus on revenue growth on both existing and new markets remains quintessential for CFOs. 65% of the respondents list them as the two most important focus areas in the coming year.

Over 41% of the respondents place investments in the top half of their priority list, which reflects the need to support growth in the long-term. This is actually a decrease of 14% compared to what our last survey showed in February 2014.

The percentage of respondents who are at the opinion that their organisations should put emphasis on improving their liquidity

positions have gone down by half compared to H2 2013 when it stood at 72%.

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Graph 4Companies’ business focus over the next 12 months ( 1 - lowest priority; 6 - highest priority)

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Cost Reduction - direct costs

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SKRS ROPLLVLTXKHUEECZHRBGAL SL

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The expected increase in M&A activities goes in line with the CFOs’ goal of increasing revenues, especially in a market, where this can be difficult to achieve organically. Close to 64% of our respondents anticipate a rise in M&A activity in the country, which is an 18 percentage points increase from last year’s answers. It is noted that the group with no particular view on the issue has shrunk to 28% compared to 36% in H2 2013.

In 2014 the Bulgarian M&A market is down from its 2013 levels with only a handful of deals, with local businesses acquiring established international brands (FMCG sector) and new international players entering (TMT industry).

Graph 5How CFOs expect levels of M&A activity to change in Bulgaria over the next 12 months

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At the end of a year of uncertainty - both internal & external by nature - CFO optimism and priorities stay within the ranges observed in the previous survey. Supporting revenue growth remains paramount.


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Key findings summary Growth

•Similar to the last edition of the survey,

CFO level of optimism remains unchanged.

•Respondents are not expecting improvement

in the levels of unemployment.

•CFOs are determined to support growth of

their companies, albeit through using own

funds for planned investments.

•M&A activity in 2014 was lower in both

value and volume compared to 2013, yet a

few landmark transactions and attempted

deals give promise for increased activity in

the months ahead.

RiskAdapting to the environment



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Risk

The level of external financial and economic uncertainty for 72% of the CFOs is high or above normal and further 8% believe it is very high. This increase reflects the affected stability of the financial sector which was shaken last summer by a run on two Bulgarian-owned banks. Corporate Commercial Bank closed and several months later had its license revoked, and First Investment Bank received state support to be repaid in 2016.

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Graph 6CFOs’ opinions on the general level of external financial and economic uncertainty facing their businesses

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CFOs persist in their cautiousness to take on additional risk on their companies’ balance sheets with 89% of the poll responding negatively to this question. In the context of responses to revenue growth and new investments, it may be inferred that such investments would be financed primarily with own funds.

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Graph 7CFO views on whether this is a good time to take greater risk on to company balance sheets

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Staying focused on revenue growth, CFOs still prefer less risk.


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Key findings summary Risk

•CFOs believe that it is still not the right time

to take more risk on to their companies’

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•Arguably, CFOs have grown accustomed to

operating in a less predictable financial and

economic environment

DebtSustained confidence


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Graph 8How CFOs rate the overall availability of new credit for companies

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Debt

The influx of deposits in the banking system as a result of Corporate Commercial Bank’s collapse should put pressure on yields of savings products and consequently is expected to lead to a decrease in the interest charged on loans, including investment ones. Therefore, we may expect to see change in CFOs’ attitude towards leveraging their companies’ accounts, reflected in our next survey.

The number of CFOs today, who realise that credit is easily available has more than doubled, compared to a year ago. Respectively, those who believe that credit is difficult to obtain have fallen in number from one in four in the second half of 2013 to one in seven in 2014.


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The majority of CFOs (94%) expect the companies’ ability to service debt over the next three years to increase, or to remain the same. We note that almost one in three sees little change in companies’ repayment capacity. Simultaneously, for the first time in our survey there are respondents (albeit less than 3%) who anticipate risk in the coming three years with respect to their companies’ debt servicing ability.

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Graph 9How CFOs expect their ability to service debt to change over the next three years

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In this edition we note a trend of slight turn in attitudes on gearing - the sharp drop in the number of respondents who expected a reduction of the level of debt in H2 2013 is now paired by a three percentage point increase.

Again, similar to the results from H2 2013, clear majority (over 61%) anticipate no change in gearing levels.

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Graph 10How CFOs expect their levels of gearing to change over the next 12 months

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Credits are easier to get; no problem with debt-servicing in the long-term.


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Key findings summary Debt

•The majority of CFOs expect no change in

the gearing levels of their companies despite

an obvious change in the expectations that

credits are easily available presently

•Almost every respondent expect their ability

to service debt over the next three years to

increase, or to remain the same

FinancingFinancing costs - up or down?



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Financing

While CFOs’ opinion of the degree of credit availability straight-forwardly suggests it would be easier to obtain a loan, the interviewed are split in their perception as to whether the overall financing costs would increase or decrease in 2015.

As much as 53% of the respondents expect the financing costs to increase and only one in four anticipate a slight decrease.

Taking under consideration the expected decrease of interest charges in the banking system as a whole from the injection of nearly €1.84bn of guaranteed deposits in fewer banks (after the collapse of Corporate Commercial Bank), this expectation of increased financing costs can be explained by an anticipation of a raise in fees and commissions (i.e. changes to the revenue structure of the financing institutions).

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Graph 11How CFOs expect the costs of finance for companies in Bulgaria to change over the next 12 months

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The somewhat neutral position that 72% of CFOs previously had on the attractiveness of bank loans is now replaced. In line with the responses we obtained to the previous question regarding the anticipated changes in financing costs, we observe a split between those who think that bank borrowing is becoming more attractive (27%, or a 7% increase from our last survey) and those who are under the contrary view that it is in fact an unattractive source of funding (19%, or a 12% increase from H2 2013 responses).

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Graph 12Currently, CFOs believe bank borrowing as a source of funding is:

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When analysing CFOs responses to funding through raising equity, we see that the trend speaks of perception that this is less and less an attractive source with the level of negative responses almost reaching the levels of our first survey in the second half of 2012 (currently 39% of respondents). Correspondingly, we observe a fall in CFO numbers who view equity as an attractive source of funding and those who lack strong preference for it.

This observation further strengthens the point that any potential new investments that CFOs are planning in the coming year would most likely be financed with companies’ existing funds.

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Graph 13Currently, CFOs believe raising equity as a source of funding is:

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While the proportion of respondents, who believe credit is easily and normally available increases, CFOs hold different opinions on the attractiveness of borrowing and the cost of finance.


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Key findings summary Financing

•Credits are easier to get according to our

respondents, but CFOs disagree on whether

the overall costs of financing would increase

or decrease

•CFOs are likely to avoid raising equity

•Similarly, we observe a split between those

who think that bank borrowing is more

attractive and those who are of the contrary

understanding

TalentNo talent shortages on the screen



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Talent

Similar to the majority of CFOs in the region, our respondents anticipate no specific shortages in talent in the next 12 months.Bulgaria ranks fourth (just after Hungary) with slightly over 20% of the CFOs foreseeing particular talent deficit. The only significant gap is expected in the middle and senior level in finance jobs, where the past professional experience plays a great role in determining the success of hiring, as well as moving up the hierarchical ladder.

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Graph 14Expected talent shortages in finance over the next 12 months

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Finance professionals on senior and mid-level are most on demand, however CFOs in Bulgaria do not expect significant talent shortages in the finance area in the short term.


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Key findings summary Talent

•Lack of talent is not among the concerns

of the CFOs - 78% of them do not expect

talent shortages in finance for the year

ahead

•Highest demand of finance professionals is

anticipated on the middle (43%) and senior

(27%) levels, whereas CFOs are comfortable

with the availability of young people making

their first steps on the labour market.

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Local contextUrgent reforms to support growth



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Local context

Even though external uncertainty is perceived high and influencing the domestic environment, CFOs agree that the economic growth in Bulgaria is mostly dependent on internal factors and needs to be supported by urgent reforms, grounded on political consensus. While the European Commission still finds corruption a serious issue which hinders economic stability and growth in Bulgaria (along with the reform of the judiciary), only 6% of the respondents believe anti-corruption measures could be a significant growth influencer. Finance stability on macro-level and further recovery in the Eurozone are considered more important, with respectively 14% and 17% supporters.

Technology development is less critical according to the respondents.

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Graph 14According the CFOs the most important growth factors of the Bulgarian economy for the upcoming 12 months are:

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There is no consensus view among CFOs on where should the government focus on in order to diminish the cost of doing business. Reduction of licensing and approval regime (36%) and improvement in civil judicial process (33%) find almost equal support, closely followed by making the labour legislation effective and flexible (25%). Social assurance cost and taxes do not seem to be a burden for the respondents.

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Graph 15In CFOs’ opinion to reduce the cost of doing business, the government should focus on:

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Key findings summary Local context

•Political consensus is seen as a major factor for

the government to deliver reforms needed for boosting

the economy of the country. Macro-finance stability is

perceived second important factor (17%), followed by

further recovery in EU (14%).

•In CFOs’ views growth is less related to technological

development (3%) and anti-corruption measures (6%).

•CFOs have different opinions on what should

the government focus on to reduce costs of doing

business – they are split between reduction of licensing

and approval regime (36%), improvement in civil

judicial process (33%) and optimization of the labour

legislation (25%).


For more information on the Deloitte CFO Survey please contact:

Vasko [email protected]+359 (2) 8023 123

Todor TodorovDirector, Financial [email protected]+359 (2) 8023 172

About the survey

The 6th CE CFO survey took place in October & November 2014. A total of 550 CFOs across 14 countries completed our survey. The Deloitte CFO Survey is the only survey that seeks to establish the views of CFOs in relation to the financial markets, economic outlook and business trends on an anual basis.

Deloitte CE CFO survey is a “pulse survey” that provides CFOs with information regarding their peers’ thinking across a variety of topics. It is not, nor is it intended to be, scientific in its number of respondents, selection of respondents, or response rate —especially within individual industries.

We would like to thank all participating CFOs for their efforts in completing our survey. We hope the report makes an interesting read, clearly highlighting the challenges facing CFOs, and providing an important benchmark to understand how your organization rates among peers.

Dessislava KirkovaManager, Clients&[email protected]+359 (2) 8023 172

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, tax, consulting, financial advisory and legal services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 200,000 professionals are committed to becoming the standard of excellence.

Deloitte Central Europe is a regional organization of entities organized under the umbrella of Deloitte Central Europe Holdings Limited, the member firm in Central Europe of Deloitte Touche Tohmatsu Limited. Services are provided by the subsidiaries and affiliates of Deloitte Central Europe Holdings Limited, which are separate and independent legal entities.

The subsidiaries and affiliates of Deloitte Central Europe Holdings Limited are among the region’s leading professional services firms, providing services through more than 3,900 people in 34 offices in 17 countries.

© 2015 Deloitte Central Europe

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